Frankfurt regulator demands answers on LSE/Deutsche Börse

One of the German regulators with the power to veto the proposed tie-up between Deutsche Börse and London Stock Exchange Group has said Britain’s decision to leave the EU throws up fresh questions about the future of the deal.

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Hesse is one of the German federal regulators that must give the merger permission to proceed and Tarek Al-Wazir, the Hessian economic minister of the Green Party, said in videos posted on his Facebook page on June 24: “Brexit is a bad decision, a bad decision for Europe, for Germany and Hesse, but also for the UK.”

The LSE and Deutsche Börse stated from the outset that the combined group’s holding company would be based and regulated in the UK. However, many think German authorities would refuse to sanction a deal if the holding company lies outside the EU.

Al-Wazir said his team was evaluating all aspects of the merger but also “asking additional questions” to those that were already on the agenda before the UK’s ‘Leave’ vote, including how a holding company outside the EU could be governed.

He said: “We, in Hesse, also have a financial centre in Frankfurt and that will likely benefit when London is no longer the biggest financial centre in the European Union.”

The two exchanges said in a June 24 joint statement within hours of the vote result that the “outcome of the referendum does not impact the compelling strategic rationale of the merger”. They added that they remained “fully committed to the agreed and binding merger terms, and continue the process of obtaining the necessary approvals”.

However, analysts have said the vote was a problem for the deal. Analysts at brokerage Equinet said it would reduce shareholder enthusiasm and add complexity to the decision to give it regulatory approval.

It is for exactly this reason that a key shareholder vote on the deal had been planned for after the referendum. LSE investors are scheduled to vote on the merger on July 4, while the tender offer for Deutsche Börse’s investors will end on July 12.

The deal could be hit by a potential move by the European Central Bank to reprise attempts it made in 2014 to force all euro-denominated clearing into the eurozone, a decision which would impact the LSE’s London-based clearing house LCH.Clearnet. LCH handles sizeable amounts of euro-denominated business.

Al-Wazir said: “Even that will be in question, if that can still happen there.”

He added: “Frankfurt has become a more international financial centre over the past years, the ECB is headquartered here and some bank regulators. We also know, and that is something we have known for months, that several banks that have their European headquarters in London are asking themselves where their headquarters will be.”

Hesse is one of 20 regulators that need to approve the deal, including authorities as far afield as the US, Russia and Singapore. The merger could also be disrupted by the depreciation of the pound, which could make the deal look less attractive for Deutsche Börse’s shareholders.

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